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UBS reports first quarter net profit of CHF 1,363 million

14 May 2002, 07:00Quarterly Results

UBS reports net profit after tax in first quarter 2002 of CHF 1,363 million, 14% less than the same quarter a year earlier but 23% higher than fourth quarter 2001. Pre-goodwill, and adjusted for gains from the sale of Hyposwiss, profit was CHF 1,574 million, 17% less than the same quarter a year earlier but 10% higher than the fourth quarter 2001. Although the market environment remained difficult, revenues continued to recover, showing the benefit of a diverse business mix.

UBS achieved first quarter 2002 net profit after tax of CHF 1,363 million, 14% less than the same quarter a year earlier but 23% higher than fourth quarter 2001. Pre-goodwill, and adjusted for gains from the sale of Hyposwiss, profit was CHF 1,574 million, 17% less than the same quarter a year earlier but 10% higher than the fourth quarter 2001. Overall profitability grew for the second consecutive quarter, with every business unit (except UBS Capital) recording quarter-on-quarter growth. The highly successful Swiss domestic banking business again posted record pre-tax profits.

"The market environment remains difficult, but the progress of all our businesses is very encouraging. We continue to see the benefits of our disciplined cost and risk management, our strategic focus and our diverse business mix," said President Peter Wuffli.

Wealth management results proved resilient despite the uncertain sentiment, and UBS Warburg's core Corporate & Institutional Clients unit performed very well - driven by record fixed income results. A large proportion of the Group's drop in profits compared to first quarter 2001 was recorded by UBS Capital, which continues to post disappointing results as wider economic difficulties depress private equity valuations.

Operating income in first quarter 2002 was CHF 9,589 million, down 5% compared to first quarter 2001, but up 13% compared to fourth quarter 2001. Wealth management businesses provided stable growth, with revenue increasing quarter-on-quarter, thanks in particular to growth in asset-based fees. These recurring fees rose both in Private Banking and in UBS PaineWebber, to record levels in the latter. Investment fund fees also hit an all-time high.

General and administrative expenses dropped 9% compared to first quarter 2001 to CHF 1,700 million, their lowest level since the merger with PaineWebber, reflecting deep cuts in marketing, travel and entertainment and technology spending. Personnel expenses rose 1% to CHF 5,317 million on higher performance-related compensation. These costs are managed on a full-year cycle with the fixing of annual performance-related compensation made in the fourth quarter. Headcount discipline continues to make capacity cuts unnecessary and leave scope for strategic investments.

Credit loss expense was CHF 85 million in first quarter 2002 or 3 basis points of the loan book for the quarter, compared to CHF 115 million in fourth quarter 2001 and CHF 136 million in the same period a year earlier. The Group benefited from the improved quality of the Swiss domestic portfolio while UBS Warburg continues to manage risk cautiously and to make effective use of credit protection.

Clients invested CHF 11.8 billion in net new money in first quarter 2002, a satisfactory result given the current market environment and the short term impact of the Italian tax amnesty, which reduced net flows in Private Banking in this quarter by CHF 4.5 billion. The strategic build-up of domestic private banking activities in Italy helped UBS retain nearly half of the CHF 8.4 billion in repatriated assets. UBS PaineWebber, the Group's US private client business, continued to gain market share from its US private client peers and generate strong net new money, capturing CHF 7.4 billion in net new money this quarter. UBS's investment funds continued to attract net inflows.

Performance against Group financial targets: Pre-goodwill and adjusted for the one-off gain from the sale of Hyposwiss in first quarter 2002:

Annualized return on equity was 15.2%, within the target range of 15-20%, but below the 17.6% achieved in the first quarter a year earlier.

Basic earnings per share were CHF 1.27, 15% lower than the first quarter 2001, but ahead of last year's quarterly average.

Outlook 2002 As in 2001, UBS performed relatively strongly in the first quarter. The diversity of the Group's revenue streams continues to mitigate the effects of adverse market conditions and low levels of client activity.

Regrouping and management accounting changes On 29 April, UBS published restated figures for 1999, 2000 and 2001 that reflect its new Business Group structure, which has been effective from 1 January 2002. UBS also instituted a number of management accounting changes, the foremost being the allocation to the Business Groups and business units of goodwill arising from the merger in 2000 of UBS and PaineWebber. None of the changes have an impact on the Group Financial Statements for 1999, 2000 and 2001. They only affect the results of the Business Groups and business units. All figures in this quarter reflect the new structure.

Results of the business groups

(adjusted for significant financial events 1)

UBS Switzerland

The Private and Corporate Clients business unit achieved another record result in the first quarter, with profit before tax rising 24% from fourth quarter 2001 to CHF 705 million, representing an annualized return of 47% on its allocated regulatory equity. Operating income rose 5% to CHF 1,665 million, as fee and commission income recovered slightly from the previous quarter's levels and benefited from certain one-off items. Interest income, on the other hand, suffered some margin pressure.

The cost/income ratio improved significantly, falling to a record 55% from the previous low of 59% in fourth quarter 2001, thanks to continued stringent cost management and a 22% reduction in headcount in the three and a half years since the merger of Union Bank of Switzerland and Swiss Bank Corporation. Net new money totalled CHF 1.3 billion, mainly invested by corporate clients.

Private Banking's profit before tax was CHF 601 million, up 3% from fourth quarter 2001. Total operating income increased 3% to CHF 1,593 million, driven by the slight improvement in market conditions in the first quarter and higher contributions from the European wealth management initiative. The entire increase was driven by improved asset-based income, which now comprises 71% of total income, while transaction-based income remained at the fourth quarter level.

Net new money in the quarter totalled CHF 2.6 billion, a strong result in view of the outflows related to the Italian tax amnesty. Of the outflow of CHF 8.4 billion, UBS managed to retain almost half (CHF 3.9 billion) within its Italian domestic business. Excluding the effect of the Italian tax amnesty, net inflows clearly surpassed both the CHF 4.2 billion inflow recorded in fourth quarter 2001 and the CHF 4.5 billion in the first quarter a year ago.

UBS Global Asset Management

UBS Global Asset Management reported profit before tax of CHF 75 million, up from CHF 72 million in fourth quarter 2001, as general and administrative expenses fell. Operating income eased 1% to CHF 556 million in the period, while operating expenses fell CHF 9 million to CHF 481 million.

Total invested assets rose to CHF 677 billion on 31 March 2002 from CHF 672 billion on 31 December 2001. Net new money was CHF 0.4 billion, with inflows in Asian fixed income mandates and GAM equity and asset allocation products, offset by outflows in UK asset allocation mandates and low margin US fixed income mandates.

UBS Warburg

UBS Warburg's Corporate and Institutional Clients business unit recorded a strong relative performance, with profit before tax of CHF 954 million for the first quarter, a 20% reduction from the same quarter a year earlier, but up 18% on the fourth quarter.

Operating income, at CHF 4,133 million in first quarter 2002, declined 7% from the same quarter last year, but was up 29% from the fourth quarter 2001: Fixed income and foreign exchange, where revenues rose 41% from first quarter 2001 to CHF 2,117 million and 89% from the fourth quarter, achieving a record performance, although not completely offsetting the result in equities. Investment banking revenues were largely in line with first quarter 2001 with good progress in US underwriting mandates.

UBS Warburg continued to expand its resources dedicated to the largest and most important industry sectors of the corporate finance market globally. In particular, market share in the Americas in first quarter 2002 increased to 3.6% from 3.4% for the full year 2001.

Personnel expenses this quarter increased to CHF 2,425 million, up 3% from first quarter 2001, due to higher levels of incentive-based compensation. The ongoing cost management program helped to push general and administrative expenses down by 17% from first quarter 2001 and 9% from the fourth quarter.

UBS Capital's operating loss widened to CHF 462 million from CHF 287 million in fourth quarter 2001, reflecting difficult conditions in private equity markets, leading to increased writedowns, and few opportunities for secondary market exits. Total operating expenses, at CHF 30 million in the first quarter, were at their lowest level in over a year. There were no material divestments in the quarter.

Looking ahead, conditions will remain difficult for private equity valuations and exit opportunities will remain limited. Until markets recover and more favorable exit opportunities arise, UBS Capital will likely continue to report losses over the next several quarters. UBS continues to focus on maximizing the value of the existing portfolio, making no significant additional investments.

UBS PaineWebber

UBS PaineWebber recorded a pre-tax loss of CHF 171 million compared to a loss of CHF 217 million for the fourth quarter of 2001 and a loss of CHF 114 million in first quarter 2001. When commenting on UBS PaineWebber results, UBS focuses on the operating profit excluding acquisition costs (goodwill amortization, net goodwill funding costs and retention payments) to isolate underlying performance. On this basis, pre-tax profit rose 23% to CHF 164 million from CHF 133 million in fourth quarter 2001 and was down 30% from CHF 233 million compared to first quarter 2001.

UBS PaineWebber's results underscore the resiliency of its private client franchise despite the prevailing market conditions. The business performed well in comparison to its US private client peers. Client transaction activity during the first quarter was slightly higher than fourth quarter 2001, but was down 13% from first quarter 2001.

Operating income was CHF 1,600 million in the first quarter, an increase of 6% from fourth quarter 2001 thanks to strong results in municipal securities, increased recurring fees and currency effects. Compared to the first quarter a year earlier, operating income fell 7% on the reduced level of client activity.

Total personnel expenses were CHF 1,223 million, a 2% increase from fourth quarter 2001. Excluding currency effects, personnel expenses were 1% lower than the fourth quarter, principally reflecting lower variable compensation. Compared to the first quarter a year earlier, personnel expenses were down 6%, reflecting lower revenue-driven compensation and reduced levels of support staff.

Net new money was CHF 7.4 billion in the first quarter, compared to CHF 8.5 billion in the fourth quarter and CHF 6.2 billion in first quarter 2001. That pushed invested assets to CHF 779 billion at 31 March 2002 from CHF 769 billion at 31 December 2001. The cost/income ratio before acquisition costs was 90% for the first quarter, an improvement of two percentage points from fourth quarter 2001, reflecting continuing cost control initiatives. Among private client peers, UBS PaineWebber is the only firm reporting an improvement in the cost/income ratio quarter-onquarter.
Significant Financial Events:
In first quarter 2002, UBS realized a pre-tax gain of CHF 155 million from the sale of Hyposwiss. This was recorded as a significant financial event. In first and fourth quarter 2001, there were no significant financial events. (See UBS First Quarter 2002 Report for the full details of the effect of significant financial events in 2002 and 2001.)

Cautionary statement regarding forward-looking statements

This communication contains statements that constitute forward-looking statements", including, but not limited to, statements relating to the implementation of strategic initiatives, such as the implementation of the new European wealth management strategy, expansion of our corporate finance presence in the US and worldwide, the development of UBS Warburg's new energy trading operations, and other statements relating to our future business development and economic performance.While these forward-looking statements represent our judgments and future expectations concerning the development of our business, a number of risks, uncertainties and other important factors could cause actual developments and results to differ materially from our expectations.These factors include, but are not limited to, (1) general market, macro-economic, governmental and regulatory trends, (2) movements in local and international securities markets, currency exchange rates and interest rates, (3) competitive pressures, (4) technological developments, (5) changes in the financial position or credit-worthiness of our customers, obligors and counterparties and developments in the markets in which they operate, (6) legislative developments, (7) the impact of the terrorist attacks on the World Trade Center and other sites in the United States on 11 September 2001 and subsequent related developments, (8) the impact of the management changes and changes to our business group structure that took place in December 2001 and (9) other key factors that we have indicated could adversely affect our business and financial performance which are contained in other parts of this document and in our past and future filings and reports, including those filed with the SEC.More detailed information about those factors is set forth elsewhere in this document and in documents furnished by UBS and filings made by UBS with the SEC, including UBS's Annual Report on Form 20-F for the year ended 31 December 2001. UBS is not under any obligation to (and expressly disclaims any such obligations to) update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.